A child holds up a piece of bread during a demonstration in Yemen's second biggest city of Taiz in this August 15, 2007 file photo. REUTERS/Khaled Abdullah

Inflation has surged in Gulf countries, fuelled partly by lavish spending of record oil and gas revenues. This is also spurring demand for everything from housing to power and water.

Gulf states with currencies pegged to the dollar have also been hit by the global weakness of the U.S. currency, which is driving inflation by making some imports more expensive.

But wrestling with rising prices is a grimmer business in Arab capitals not cushioned by oil wealth. From Cairo in Egypt to Sanaa in Yemen, mostly authoritarian governments have to weigh the fiscal costs of subsidizing fuel and food against the explosive political risks of social discontent.

“Nothing’s inexpensive any more,” griped Jihad al-Amin, who owns a dry-cleaning store in Damascus, Syria. “Even parsley, which has been dirt cheap for as long as I can remember, has tripled.”

Food price rises hit the poor hardest in the Middle East, as in other food-importing developing countries around the world, but any instability here could ripple far beyond the region.

“Because the Middle East is such a sensitive area, we have to watch it that much more closely,” said Robin Lodge, a Rome-based spokesman for the World Food Program (WFP), a U.N. agency which feeds nearly four million people in Egypt, Iraq, Syria, Yemen and the Israeli-occupied Palestinian territories.

“The consequences of discontent, anger in the Middle East can be more geo-political than they may be elsewhere — the huge wealth disparity is another thing to take into account.”

In the United Arab Emirates and Bahrain, the combination of rising prices and falling dollar purchasing power has sparked riots and protests by migrant workers, many of whom live in squalor among the skyscrapers and sports car showrooms.

Inflation has jumped across the region. In Saudi Arabia, the yearly rate hit 8.7 percent in February, a 27-year high.

A regional average compiled by the Economist Intelligence Unit and not weighted for gross domestic product put inflation in the Middle East and North Africa at 8.9 percent last year.

“We see it going up to 9.9 percent this year and 8.5 percent next,” said Caroline Bain, an editor at the EIU in London. “It’s not that high a figure, but it’s coming from a region where historically inflation was negligible, with some exceptions.”

POLITICAL REPRESSION

Discontent may be rising as inflation erodes the living standards of Arab middle classes and makes the poor hungrier, but some analysts doubt this will lead to political upheaval.

“The effect is poverty, social unrest, people living more miserably,” said Louis Hobeika, an economics professor at Lebanon’s Notre Dame University. “But it won’t go beyond that because of political repression by Arab dictatorships.”

Nevertheless, the problem is global and will not go away.

“Largely because of rising fuel prices, growing demand from developing economies and to some extent the effect of the biofuels industry, we are seeing rapidly declining food stocks and sharply rising prices,” said the WFP’s Lodge.

The U.N. agency has seen prices rise 40 percent in the past nine months for the grains, pulses and vegetable oil it buys.

Food prices in Syria have risen 20 percent in the last six months, Lodge said. In Yemen, one of the Arab world’s poorest countries, the price of wheat has doubled since February, while rice and vegetable oil have gone up 20 percent in two months.

Consumers face tough choices as food takes a bigger chunk of family budgets, perhaps leaving less for health and education.

Nidal Makhloof, a wholesale merchant in the West Bank city of Ramallah, said his customers were cutting back on all but essential items. “This mad global surge of prices has curbed the purchasing appetite,” he added.

In Lebanon, Central Bank Governor Riad Salameh said the purchasing power of the Lebanese was a “major concern” after it declined 10 to 15 percent last year due to higher oil and commodity prices and the dollar’s weakness against the euro.

Pierre Zoghbi, managing director of Mainspring, a food and beverage supplier, said prices of imported food, including dairy products, had risen 145 percent since late 2007.

“It is both amazing and horrible at the same time,” he said, blaming the strong euro. The Lebanese pound is effectively pegged to the dollar. “The currency changes affect us a lot.”

SOFTENING THE BLOW

The response from Arab governments has varied.

Several Gulf oil producers have tempered the impact of higher food and housing costs by raising wages of their nationals — at the risk of fuelling domestic inflation.

But many Saudis were disappointed by a five percent wage hike for public employees in January after Gulf neighbors had already increased salaries by bigger margins.

This week, Saudi Arabia said it was cutting import tariffs on food, such as frozen poultry, dairy goods and vegetable oils, and building materials.

Countries like Egypt, Syria and Yemen — all modest oil exporters whose output is declining — are straining their budgets by maintaining subsidies deemed vital to their people.

Jordan, unable to meet the cost, removed fuel subsidies in February, sending diesel and kerosene prices up 76 percent overnight. The government is promising to soften the impact with public sector wage increases and social safety nets.

In Egypt, where more than 14 million people live on less than $1 a day, inflation jumped to an 11-month high of 12.1 percent in February, largely due to rising food prices.

For decades, Egypt has provided cheap bread to its working poor to help them survive and to ward off discontent. This year queues for subsidized bread have lengthened, tempers have flared and 11 Egyptians have died in the lines since early February.

Prime Minister Ahmed Nazif told Reuters in March that people who were once willing to pay extra for free-market bread could no longer afford it, adding to demand for subsidized loaves.

The Egyptian government has banned rice exports from April to October to hold down local prices.

Wealthy Gulf countries could come under pressure to increase aid flows to less well-off Arab countries to compensate for the pain of rocketing oil and food import bills, but in the past such assistance has often been tied to political considerations.

The WFP says Gulf states should consider donating more to international agencies trying to assuage poverty in the region.

“With oil wealth should come a degree of responsibility — especially since the price of oil that is making them even wealthier is one of the forces driving more and more people into poverty over food,” Lodge said.